HomeMy WebLinkAbout1981-03-17; City Council; 6047-4; Lease Purchase Agreement for City Computer SystemGl'fY OF Chln.t:Bt l) ---... _ .. ____ ..__~-
DEJ'/1 .G'l1l•1EN'r: Finance ·--------------------------------
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S tr.1 temcnt of: the_ Motter
On January 13, 1981, the City Council adopted Resolution #6405 awarding the contract
for a new computer system to the Public Agencle~ Data Systems. The same council
action instructed staff to solicit bids for lease/purchase financing options for this
system.
A reque~t for proposal was submitted to three financi&l institutions who havP. indicated-
an Interest in serving the City. These proposals were to include the monthly cost 1
interest rate and information on lease or purchase options available to the City.
The results of this request are summarized below:
Company
PHO Leasing
Bank of
A.11er ica
Cal iforriia
First Bank
Financed
$i26,295
126,295
Total 60 Month
Interest Rate Payment .System Cost Comments
22.8% (,l) $3,334.19 $212,681 lhls 'is a lease
agreement with a 10%
purchase option.
10% 2,683.76 161,003 Lease/purchase agreement. -Did not respond.
(1) Financing $212,681 over a 60 mcnth period. This rate was not
stated in the proposal.
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The analysis of whether to lease/purchase or buy equipment is based upon.assumptions about
i~terest rates and cash flow. Generally speakin~, if the City can secure lease/p~tchase
financing at an interest rate below the existing market rates earned on the investment of
City funds, it ls to the City's advantage to use a lease/purchase option.
The bids from PHO Leasing and Bank of America reflect different approaches to the same
problem. PHO is offering a lease option pric~d at 22%, or about one to two points above
the prime interest rate. This 1·ate makes this alternative much too expensive since City
investments are earning three to four points below prime. The cost to the City of this . ' alternative would actually be more than the cash price of the system • .
The 'Bank of America bid offers a 60 month lease/purchase agreement priced at 10% or about
one half the present prime interest rate. With the City investment pool presently earning
10% to 17%, the actual cost of the computer system will be reduced by as much as $16,000.
For analysis purposes, I have assumed the City will be able to earn at lea~t 12% on
investments which equates to a savings of about $6,000 on the total cost of the system.
A short an~lysis of both proposals is attached. :
Lease/purchase Agreement
page 2
Exhibits
Analysis of Lease/Purchase Proposals
Memo from City Attorney regarding Lease/Purchase Agreement
R"SO 1 ut ion lo L{ 'fO
Fi sea 1 Impact
The Bank of Am~~ica porposal has a positive effect on the City's position. Based upon
conservative Interest rates, the Bank of ~~erica proposal will bring the total cost of
the com~uter system down to $120,649 or $5,646 less than the actual cash price. The
annual cost of this agreement will be $32,205.12.
The 1980-81 costs of this purchase will depend upon timing of the installation; however,
ff the City accomplishes installation in April, three monthly payments of $2,683.76
will be required ($8,051.28).
Recommendation o
Approve Reso 1 ut ion (, l/7 0
MEMORANDUM
DATE: February 19, 1981
~O: Finance Director
FROM: City Attorney
SUBJECT: LEASE PURCHASE AGREEMENT REGARDING HEWLETT-PACKARD
H.P. 3000 COMPUTER
We have been requested to provide you with our opinion that the
City's procedures and actions relating to a transaction; i.e.,
lease purchase of a Hewlett-Packard H.P. 3000 Computer conforms
with all requirem~nts of law. In that regard, we provide th~
following opinion:
1. The lease purchase agreement proposed between th~ City of
Carlsbad and the Bank of America does not violate the
constitutional debt limit con';:ained in Article XVI,
Section 18, of the California constitution. Article XVI,
Section 18, of the California Constitution provides in
pertinent part:
"No ••• City ••• shall incur any indebtedness
or liability in any manner for any ~urpose exceed-
ing in any year the income and· revenue provided
for such year without the consent of two-thirds of
the qualified electors thereof voting at a special
election to be held for that purpose •••. 11
It has been judicially recognized that lease purchase
agreements entered into in good faith and creating no
immediate indebtedness of the aggregate installments, but
rather limits liability to each installment as it falls
due and each installment is for considera~ion actually
provided, does not violate the constitutional debt limit.
Starr v. City and' County of San Francisco, 72 Cal. App. 3d
164, 140 Cal. Rptr. 73 (1977); County ·of ,r.,os Ar.~eles v.
Nesvig, 231 Cal. App. 2d 603, 41 Cal. Rptr, 918 (1965);
Citf of Los Angeles v. Offner, 19 Cal. 2d ~Bj, 122 P.2d
141942). The cases have indicated that passage of title
at the conclusion of the lease purchase without any option
price being paid is valid. Starr v. City and County of
San Francisco, supr~; Dean v. Kuchel, 35 Cal. 2d 444,
218 P.2d 521 (1950). In other words, lease purchase
agreements are valid if (a) each year's installments are
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Finance Director
Feb~uary 19, 1981
rage 2
within the City's inc011~e and (b} each year I s payment is
for consideration actually furnished in that year. On
the other hand, if the instrument creates a full and
complete liability upon its execution, even if it is
designated a lease, it may be determined that the designa-
tion is a subterfuge and that the ag=eement is actually a
conditional sales contract and void. One of the most
frequent items which invalidates a lease purchase agreement
is the acceleration clause whereby upon default of payment
of the rents, the "lessor" can accelerate the payments
and require that the full price be paid at once. The courts
have determined that inclusion of such items as taxes,
insurance, and maintenance are properly within the scope
of charges to be included in the rental installments. In
the present lease under consideration, it is clear that if
the lessee does not pay the rent as it becomes due or
defaults in other aspects of the performance of the lease
purchase agreement, the lessor may terminate lessee's rights
under the lease and require the lessee to return possession
of property. The return of the property must be in as good
of condition as when delivered to the lessee, less reasonable
wear and tear. These are standard lease terms and are
evidence that the lease purchase agreement is not a subterfuge
but in fact is a true lease. The fact that the title will vest
in the lessee upon completion of all its obligations under the
lease, does not detract from the fact that the agreement is in
fact a lease agreement.
In analyzing the payment schedule proviaed with the lease
agreement, it would appear that the monthly lease payments
are within the City's income and I would assume are reason-
able consideration for actual use of the computer. Since we
do not know the going rate for computers, we cannot offer
any opinion on the latter point. The issue is quite simply
whether the payment of $2,683.41 for a co~puter of the nature
involved in this agreement is a reasonable rental fee.
Based on the foregoing, we have concluded that the lease
purchase agreement does not violate the provisions of
Article XVI, Section 18, of the California Constitution.
2. The second question is whether the lease purchase of the
computer complies with the requirements of Chapter 3.28 of
the Carlsbad Municipal Code. In this instance competitive
negotiation was authorized by the City Council and the
requirements of Section 3.28.140 were met. This being
the case, all the requirements of Chapter 3.28 have been
met.
Finance Director
February 19, 1981
Page 3
3. We would like to point out certain aspects of the lease
agreement which appear to be out of order. The agreement
provides that "the lessee shall pay lessor as rental charges
an amount computed as follows" and then 1. sts seven separate
items which will be included in the rental charge. Only items
one and three are filled in on this agreement. The next
full line of the contract provides that "lessee agrees to
pay the amount of total unpaid rental charges in installments
as follows" and then there's an attached schedule of rental
payments. Because line 7 is not filled in there is no amount
for the defined term of "unpaid rental charges." I believe
that is simply a typographical error on the part of whoever
filled out the agreement. The second item that causes us some
concern is subparagraph (a) on the back side of the agreement
which provides that any additions and improvements made to the
unit shall become the property of the lessor. The agreement
in subparagraph (f) provides if the lessee complies with all ,
obligations in the lease and the lease has not been terminated
before the full term, the units shall become exclusively the
property of lessee free and clear of any liens and encornbrances.
Because "units" is defined as the property which is the su.bject
of the agreement; that is, a new Hewle~t-Packard 3000 Series
Computer, it is possible that additions and improvements would
not be included within the provisions of subparagraph (f). We
assume that it LS the City's intent that at the end of the
sixty month period the computer, plus any additions or improve-
ments made to the computer, will become the property of the
City. Especially ii the City made the additions and improve-
ments. If the lessor made the additions or imptovefuents,
adjustments to the rent could be made or a payment at the end
of the lease term, provided t~at the payment ~id not exceed
the income of the City for that year or could be made as part
of an option-type agreement. Other than that, the agreement
appears to be in proper form and our office could approve it as
to form.
If you have any questions, please let us know.
DSH/mla
VIic(':~~ONDO, JR., City Attorney
By"--ji ~ ~
DANil@?' S. 0 HENTSCHl<E,,,A sistant
City Attorney
CITY OF CARLSBAD
ANALYSIS OF LEASE/PURCHASE PROPOSALS
January 27, 1981
PHO Leasing_ Bank of America
Amount financed $126,295 $126,295
Term 60 Months 60 Months
Monthly payments 3,334.19 2,683.76
Buyout at end of lease 12,630 -0-
Effective interest rate 22.8%(l) 10%
Total 60 month cost 212,681 161,003
Present value@ 12%(2) 159,351 120,649
(1) Computed based upon a total cost of $212,681 over 60 months.
(2) For this caiculation it is assumed that City investments will earn at least
12% per year for the next five years.
Total cash price for computer system
Present value of Bank of America's proposal
Net savings to City over five years
$126,295
120,649
$ 5,646
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RESOLUTION NO. 6470
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
CARLSBAD, CALIFORNIA, ACCEPTING THE BID OF BANK
OF AMERICA FOR THE FINANCING OF THE CITY COMPUTER
SYSTEM
WHEREAS, bids have been received by the City of Carlsbad
for th~ financing of the City's new computer system; and
WHEREAS, the City Council has determined that it is in
the public interest to persue the lease purchase method of
financing this acquisition; and
WHEREAS, the lowest responsive bid received was sub-
mitted by Bank of America with an interest rate of 10% and
monthly payments of $2683.76 over a 60 month period to be
budgeted on an annual basis; and
WHEREAS, funds are available for this purchase contract
in Account Number 22-170-3045,
NOW, THEREFORE, BE IT RESOVLED by the City Council of
17 the City of Carlsbad as follows:
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1. That the above recitations are true and correct.
2. That the bid submitted by Bank of America is here-
20 by accepted.
21 3. That the Mayor is heraby authorized to execute the
22 lease agreement as proposed by B~nk of America, on file with
23 the City Clerk.
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L
l PASSED, APPROVED ANP AOOPTED by the City Council of the
2 City of Carlsbad at a regular meeting held the __ day of
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_____ , 1981, by the following vote, to wit:
AYES:
NOES:
ABSENT:
9 ATTEST:
RONftLD C PACKARD, MAYOR
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ALETHA L. RAUTENKRANZ, CITY CLERK
(SEAL)